European shares fell on Friday and ended a four-day winning streak after signs of disagreement from European Union leaders over how to help the region's debt-ridden banks hit financial stocks.

Some traders felt the decline was a temporary blip and that the market would soon recover, but others were more negative, arguing that European stock markets could fall further.

The FTSEurofirst 300 index closed down 0.8 per cent at 1,111.85 points, while the Euro STOXX 50 index of leading euro zone shares fell 1.2 per cent to 2,542.24 points.

The STOXX Europe 600 Banking index was the worst-performing equity sector. It fell 2.2 per cent after Germany toughened its stance at an EU summit on Friday on using the region's bailout funds to directly recapitalise struggling banks.

Analysts said the EU summit, which also witnessed some discord between France and Germany over how to tackle the euro zone debt crisis, also left issues unresolved over how to help Spain's debt-ridden banks.

Tiverton Trading portfolio manager Luc Bocahut felt European equities were prone to a bigger fall-back, due to the stumbling blocks that arose from the EU summit.

"I would be quite bearish here. They really haven't made much progress," he said.

Spain's IBEX benchmark equity index fell 2.3 per cent, while shares in the country's banks also slumped.

Bankia dropped by around 14 per cent while a 3 per cent fall at Santander, Spain's main bank, took the most points off the FTSEurofirst 300 index.

The EU agreement on Friday over the new regulatory framework opens the way for the euro zone's rescue fund to inject capital directly into ailing banks during the course of 2013.

However, whether that will allow Spain to transfer some of its banking liabilities off the government's books will not be determined until later in the year.

"Last night's decision on the banking union is ceremonial as it leaves Spanish banks on the hook since no clear resolution scheme has been presented," analysts at Cheuvreux wrote in a research note.

Uncertainty over when Spain may ask for a sovereign bailout has also weighed on European stock markets in recent weeks.

Despite Friday's fall, the FTSEurofirst 300 index ended the week up 1.7 per cent.

Bastion Capital head of equities Adrian Slack felt the stock market was still "well supported" at current levels, partly because shares still offered better returns for investors via dividend payouts than benchmark government bonds or cash, with interest rates at historic lows.

XBZ European equity options broker Mike Turner also felt European stock markets could remain near their current levels, but added that some investors had taken out bets on the market falling further.

Turner said clients had bought "put" options - which bet on an asset falling on the future -- on the Euro STOXX 50 index.

These options were due to expire in December with strike prices of 1,750 and 1,700 points - implying a fall of more than 800 points in that index over the next two months.

"They are looking for a bit of downside protection in case the market comes off," he said.

Reuters